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The Corporate Sustainability Due Diligence Directive (CSDDD) was recently approved by the Legal Affairs Committee of the European Parliament, receiving criticism for being “neutered” and “watered down.” Despite these comments, the directive imposes obligations on businesses to identify and address impacts on people and the planet across their supply chain and activities. It emphasizes disclosures on pollution, deforestation, human rights violations, and could result in penalties like public statements and fines of 5% of a company’s turnover for non-compliance.

The directive applies to companies with over 1,000 employees and revenues of €450 million or more, with a phased-in implementation over three-to-five years. While some viewed the increased thresholds and extended phase-in period as weakening environmental regulations, the focus should be on the significant changes companies must make to comply. Similar compromises have been made in other regulations, and the CSDDD’s primary focus on multinational supply chains could catch smaller companies as well, necessitating a revamp of their risk management and due diligence processes.

At the heart of the CSDDD is the call for increased transparency across the value chain, forcing large companies to engage their smaller suppliers in disclosing human rights and environmental impacts. This will lead to difficult conversations and the need for robust vendor screening protocols. The regulation will establish a set of sustainability risk benchmarks that provide data for investors and consumers to assess businesses through a sustainability lens, linking profitability with environmental and human rights risks. Independent third-party verification of compliance further enhances transparency and scrutiny within the law.

Though the regulation has faced criticism, introducing a mandate for independent third-party verification of compliance and promoting increased corporate transparency reflects a bold intent that would have been unthinkable a decade ago. In the current environment of regulatory negotiations and escalating cultural debates about sustainability, the impact of regulations like the CSDDD cannot be understated for businesses. Compliance with the evolving landscape of sustainability regulations in the U.S. and Europe will require significant changes in companies’ operations and supply chain practices. Regardless of the compromises made in its final version, the CSDDD and related regulations will have a profound impact on businesses and their commitment to sustainability.

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